Late last year I wrote a blog post about green pension funds and came across 3 Laws Capital who were at the time planning to launch one of the first green funds in South Africa. Their fund has now been launched and I went to meet with Arthur Johnson to chat more about it.
I am by no means a financial guru, and like many others out there I get bamboozled by finance speak. Luckily, the 3 Laws Capital investment strategy is not a hard concept to grasp.
In our current financial system, companies are valued on how much money they make and not on how sustainable they are. In many cases environmental costs are externalized i.e. the health impacts on people living near the factory is not factored into the price of a product or water pollution from a factory has to be cleaned up by the Government rather than the polluter. This means that any detrimental impact that a company has on the environment is not factored into how much profit it is making. This creates little incentive for companies to change their operations to become more sustainable. In addition, many investors are skeptical about the importance of sustainability if it doesn’t translate into reduced costs or increased profits. But what if companies that addressed sustainability were valued more favourably over those companies that didn’t? This is precisely what the 3 Laws product aims to do.
3 Laws Capital has launched a Climate Change Fund. It invests only in listed equity and it is their research approach that differentiates this from other equity funds. They approach companies not only from a Climate Change perspective but also with mitigation and adaptation in mind. They look at a company’s “resource efficiency” which Arthur explains as kind of like going through your neighbour’s trash, it tells you a lot about them without you even knowing them. Rather than only looking at what goes in i.e. raw materials, they also look at what comes out. 3 Laws look at a combination of resource consumption and the waste creation of a company and measure how much water, waste and energy is used per unit of revenue and come up with a resource efficiency score. This, says Arthur, is preferable to purely looking at only the resources a company uses as it lacks context and is difficult to compare companies as their sizes may differ vastly.
- They audit the energy used – greenhouse gas emissions from fossil fuel consumption, industrial processes and other sources that are owned or controlled by the company.
- They look at the costs generated by water use – taken from ground or surface water or bought from the municipality
- They look at the costs of the waste generated through the company’s operations – landfill, incinerated, recycled or nuclear waste.
3 laws Capital, in partnership with Osmosis (a UK asset management company), have looked at companies across 32 market sectors and, after conducting research they give a Resource Efficiency score. Companies are then ranked in each sector and a portfolio constructed containing the top 8-10%. Companies’ resource efficiency performance is reassessed each month and they move in or out of the fund as their performance improves or deteriorates. If a company does not report all three factors (water, waste and energy use) then they would not be included at all.
Environment aside, Arthur says that companies that are more resource efficient create greater shareholder value, have higher productivity, have greater returns, better asset yields and are more innovative. 3 Laws Capital believes that climate change is the largest threat to an asset owner’s long term portfolio performance and companies that proactively act against these threats will create superior stakeholder value over the medium to long term.
When I asked about options for investing in renewable energy, Arthur explained that they only invest in listed equity, and there are no listed renewable energy companies at the moment.
Osmosis have created a bespoke product where large pension funds can choose which sector they would like to invest in, and are also able to exclude certain sectors. This will allow large pension funds to start creating green portfolios for their customers. This is great news and where you and I come in. Now that this option is available, individuals can start asking our pension funds to look into the 3 Laws product and create demand for portfolios that exclude the more energy intensive sectors e.g. coal, mining or nuclear. If enough demand is created, then this could become a product that we could all invest in.
Individuals can also invest in this product as it is a unit trust, however I was very disappointed to find out that unlike large pension funds, an individual cannot exclude certain sectors from their investment. This means you would still be investing in large polluting companies – albeit the most resource efficient ones in their sector, this is what 3 Laws call “pragmatic sustainability”. The minimum amount for individuals to invest is R10,000. But if you have a spare R10,000 lying around and you are looking for a more ethical place to invest it, you can contract Three Laws Capital on: www.3lawscapital.com
Since writing my last post about green pension funds, I did manage to find a Nedbank investment scheme that invests only in renewable energy projects. It is called the Nedbank Green Savings Bond. It is also a bit more accessible to individuals as the minimum investment is R1000. The investment period is from 18 months to 5 years and the interest is fixed at 6.85% per year.
I invested some of my savings into this fund last year. Interest can be paid out quarterly, annually or at the end of the investment period. I‘ve chosen to receive my interest at the end, so in 5 years I will collect my investment plus the interest I’ve accrued. Perhaps by then I will have saved up enough to invest in the 3 Laws Capital scheme!
Olivia Andrews – Operations Coordinator